Financial Literacy and Financial Education: Review and Policy Implications

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Annamaria Lusardi (2006)
  • Subject: Financial knowledge; retirement seminars, savings.

In recent years, as workers have gained an unprecedented degree of control over their pensions and savings, the importance of financial literacy and financial education has increased considerably. Large changes in the structure of financial markets, labor markets, and demographics in developed countries have led to this change. Consumers have a bewildering array of complex financial products – from reverse mortgages to annuities – to choose from, making saving decisions increasingly complex. Knowledge about the working of compound interest rates, the effects of inflation, and the working of financial markets is essential to make saving decisions. Several initiatives have been undertaken to improve financial literacy. The Organization for Economic Co-Operation and Development (OECD) comprehensively defines financial education as 'the process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.' Building upon this definition, I provide a review of the current state of financial literacy and financial education programs, and discuss whether workers possess the financial literacy necessary to process information and formulate saving plans.
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